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Analog Devices: a Market Leader With Stagnant Growth
Posted by: Damian Illia (IP Logged)
Date: February 19, 2014 11:30PM
When it comes to wireless network equipment, analog converters and amplifier chips are the most needed products. As one of the world’s largest chipmakers, Analog Devices, Inc. (ADI)’s converter chips are sold amongst tens of thousands of customers, with over half of all sales coming from the industrial and automotive end markets. Sales in the automotive sector have been growing at a particularly healthy pace over the past few years, due largely to that industry’s product innovation. With traditional cars sporting sensors and in-dash displays, as well as hybrid and electric autos multiplying their chip contents, the company is bound to benefit from future sales.
In the article below, I will analyze Analog Devices' past profitability, debt, capital and operating efficiency, in addition to looking at which investors have recently bought the company’s shares this last quarter. Although the company has been dedicating many of its resources to grow in the power management chip segment, success has yet to arise. Furthermore, the semiconductor industry’s cyclical nature makes it difficult for any medium-scaled chip manufacturer to maintain long-term results, especially with competing rivals like Texas Instruments Incorporated (TXN)’s market shares.
ROA - Return On Assets = Net Income/Total Assets
Another favourable aspect of this company is its 50% share ownership of the data converter analog market. Since these chips convert analog voice signals to digital signals for processing, they are fundamental for all communications infrastructure equipment. The firm’s leading market position in this segment should guarantee solid growth levels in the long term future, as it established itself as the go-to company in the data converter market.
Over the past three years, Analog Devices’ gross margin has decreased from 66.4% in 2010 to 64.3% in 2012. This decreasing margin indicates that the company has been becoming slightly less efficient year-after-year.
A worthwhile investment
Despite some negative results in the company’s balance sheet, regarding EBITDA and revenue growth, I’m confident in Analog Devices future profitability for investors. Not only does the company sport high returns on capital and a dividend yield of 2.70%, but with the stock currently trading at 24.40x trailing earnings, it sports only a minimum price premium relative to the industry average of 23.50x. Also, while revenue may not currently be on the fast-track in terms of growth, this may change as the company continues to develop and diversify its chip production.
Disclosure: Victor Selva holds no position in any stocks mentioned
Stocks Discussed: ADI, TXN,
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